Euro lifts, shares drift as ECB easing bets wane

International / 29 August 2014, 3:35pm

Reuters

File picture: Alex Grimm

London - The euro lifted off its lows and the region's shares sagged on Friday as a new five-year low in euro zone inflation was viewed as not extreme enough to force the European Central Bank back into its increasingly bare policy cupboard.

Consumer prices in the 18 countries using the euro rose by just 0.3 percent year-on-year in August, the lowest since October 2009 and well below the ECB's preferred 2 percent, but also right in line with economists' prior expectations.

printing money by buying bonds - following strongly-worded comments from ECB President Mario Draghi last week.

The euro rose to the day's high of $1.3195 (R14) against the dollar, yields on core euro zone bonds inched away from their record lows as the region's share markets also lost some of their early momentum.

“Although Draghi has waved the flag I don't thank there is enough there (in the inflation data) to instigate another round of easing,” said Bank of Tokyo Mitsubishi currency strategist Derek Halpenny.

“In terms of another rate cut, I think they will want to wait until they can be more certain that inflation expectations have become unanchored.”

But together with updated projections from ECB staff, the inflation data is likely to lead to a lively discussion next Thursday about whether the bank should accelerate existing policy measures because of the danger of deflation.

Overnight, euro zone money market rates dropped into negative territory for the first time ever on Thursday.

That essentially means banks are now paying to lend to each other, and it reflects expectations for a long period of cheap ECB money.

German Finance Minister Wolfgang Schaeuble warned on Friday, however, that the ECB has run out of tools to fight deflation, having earlier backed French President Francois Hollande's calls for greater government investment to boost growth.

It has a host of reform measures planned for September likely to push inflation even lower.

“What is more important for the ECB is inflation expectations and what is worrying for them is that they have been going down,” said Philippe Gudin de Vallerin head of European research at Barclays.

“They are clearly more nervous now,” he added, though he doubted major changes would come at next week's ECB meeting.

RUSSIAN BEARS

Worries that persistent tensions between Russia and Ukraine could damage Europe's already-weak recovery remained a concern

for markets.

The rouble was a new all-time low versus the dollar in Moscow as Russian stocks steadied after a 3.5 percent fall this week.

Earlier Asian shares had also felt the strains as they pulled back from a six-year high.

Pro-Russia rebels fighting in Ukraine said on Friday they would comply with a request from the Kremlin and open up a 'humanitarian corridor' to allow the withdrawal of Ukrainian troops they have encircled.

It was not clear how the government in Kiev would react to the offer, but the first word from the Ukrainian military was negative.

It said in a statement that the offer showed that “these people (the separatists) are led and controlled directly from the Kremlin”.